Wednesday, March 20, 2013

Tax havens are an amazing economic phenomenon. You have a location that is too small or backward to host much of a real economy like Bermuda which decides to market its corrupt ethics. Cyprus is such a place and became an especially popular destination for hot Russian money. They promised insane returns for depositors so as math would predict, the banks went bust investing in crazy schemes.

This time, the EU bailout included a tax on bank depositors. The idea is to tax some of that hot Russian money. The democratic Cypriot response has been a hearty screw you to the Eurocrats. Iceland was able to do this and get away with it because they had already decided they hated being a destination for hot money. They have locally-sourced energy and a real economy to return to. I am not sure Cyprus can claim as much

At some point the realization has to occur to even the most cement-headed conventional economist that what they believe is mathematically impossible. Of course, I have believed this since the 1980s so my faith in the perfectibility of human nature may be horribly misplaced.

Cyprus parliament rejects bank savings tax

mz/jm (Reuters, dpa, AP, AFP) 19.03.2013

Parliament in Cyprus has resoundingly rejected a measure that would tax money in Cypriot bank accounts as a condition of an EU bailout. The country’s banking system needs the bailout to prevent bankruptcy.

The measure received zero votes in favor in the 56-member parliament of Cyprus during Tuesday's vote. Thirty-six parliamentarians voted against the bank tax, and 19 abstained. One parliamentarian was absent.

The levy was intended to raise 5.8 billion euros ($7.5 billion) to help recapitalize the country's banks and service the national debt. This was a key condition of a 10-billion-euro bailout from the eurozone and International Monetary Fund.

News that the measure had failed in parliament was greeted by cheers from protesters gathered outside the parliament building in Nicosia. They had been demonstrating against the bank tax.

The government must now scramble to find another way to come up with the 5.8 billion euros or risk losing the bailout altogether.

Under the terms of the tax, accounts of less than 100,000 euros ($128,000) would have been subject to a levy of 6.75 percent to help finance the bailout. For accounts with more than 100,000 euros, the figure would have jumped to 9.9 percent. An amendment to the bill on Tuesday morning had freed accounts of less than 20,000 euros from the tax completely. more

CYPRUS VOTES AGAINST BAILOUT DEAL — 0 VOTES IN FAVOR

Matthew Boesler | Mar. 19, 2013

The Cypriot parliament has voted against the controversial bank bailout deal hatched with the EU over the weekend, reports Bloomberg.

36 voted no.

19 abstained from voting.

No one voted in favor of it.

The vote was held in a show of hands.

The big part of the bailout plan that has everyone up in arms: a controversial decision to apply haircuts to depositors, which essentially amounts to an expropriation of a certain percentage of money from everyone's bank account.

That includes insured depositors – those with up to 100,000 euros in the bank – whose funds, up to now, were widely considered sacrosanct.

Before the vote, Cypriot President Nicos Anastasiades told German Chancellor Angela Merkel in a phone call that he didn't have the political support to pass the deal through parliament, as several parties had already pledged to vote "no."

There is a lot riding on the Cypriot parliament's ability to get this bailout deal passed, including potential market volatility, but the euro has already been getting crushed today on various headlines indicating the vote looked unlikely to pass.

In a note to clients, JPMorgan economist Alex White explained why the three options facing Cyprus for making the bailout deal more palatable are all problematic, and said markets are underestimating the risks emanating from the tiny island nation.

Anger in Cyprus: 'They Can't Just Penalize Us Because of the Banks!'

By Nicolai Kwasniewski in Nicosia
REUTERS

Changes are coming to the bailout package for Cyprus, but people in the country are furious nonetheless. A forced levy on savings accounts in the country has enraged depositors and brought protesters onto the streets. Germany is the focus of their anger.

Cypriots are furious. For the first time in the euro crisis, common depositors are being asked to contribute to a bank bailout package. And they are unwilling to give in without a fight. The mood in the capital city of Nicosia is dominated by anger and disbelief -- and Monday's announcement that changes to the original aid package will be forthcoming have done little to minimize the wrath. Indeed, on Tuesday morning, there were growing indications that the Cypriot parliament would refuse to rubber stamp the bailout plan.

In Café d'Avila, several young Cypriots were gathered on Monday evening drinking beer, smoking water pipes and talking about the forced levy on savings accounts held with Cypriot banks. Not surprisingly, everyone is opposed. The one-time tax, complains Alecos, a 28-year-old teacher, is "undemocratic." He himself doesn't have much in his bank account, but it is the principle he finds disturbing. "Ordinary people have to pay, but they have nothing to do with the bank insolvencies."

Marina, who works in advertising, agrees, noting that it doesn't matter how large the levy ends up being. "The troika can't simply decide to take something away from citizens," she says, referring to the European Central Bank, the European Commission and the International Monetary Fund. She says that seizing money from simple savers cannot be the first step, whether they have €10,000 in their accounts or €100,000.

In Café d'Avila, the troika is very clearly the enemy, even if most young Cypriots are well aware of the benefits of European Union membership. "Capitalism is killing us," says Dimitri, a 32-year-old businessman who would rather see his country leave the common currency than to submit to the endless series of austerity requirements a bailout would bring. That, indeed, was the primary focus of the debate in the café on Monday evening.

Blaming Germany

One thing, though, everyone could agree on: Germany is to blame for the suffering of Southern European euro-zone member states. Everyone knows the name of Germany's chancellor, Angela Merkel, as well as that of her finance minister, Wolfgang Schäuble.

Many of those relaxing in the café had spent the afternoon protesting in front of the Cypriot parliament, the first such demonstration there in quite some time and a clear indication of the growing anger in the country. Since Saturday, Cypriots have had trouble withdrawing money, with many cash machines empty. Bank transactions have been blocked as well and while Monday was a regularly scheduled bank holiday, it was announced on Monday that financial institutions would remain closed until Thursday out of fear of a bank run.

Only some 300 people had gathered in front of parliament on Monday, but they held up signs and screamed angry slogans. Many of them were directed at new Cypriot President Nikos Anastasiades, but European leaders -- particularly those in Berlin --and the Troika were also targeted.

"Of course something has to happen," said Cassandra Konpari, a lawyer. "But they can't just penalize us because the banks aren't doing well." It was the first time that Konpari had joined a demonstration in front of parliament and she hoped that it would have an effect. The 30-year-old would rather see Cyprus follow the Greek model, involving public-sector salary freezes, the privatization of state-owned firms and a variety of other austerity measures. A friend of Konpari's, Marina Lavithia -- also a 30-year-old lawyer -- also made her way to the protest. She says she understands that the European Union wanted to target money laundering and tax dodging in Cyprus. "But they wanted to hit the Russians and they hit us instead," she says.

'Hands Off Cyprus'

It would be difficult to find a majority of Cypriots who back the Greek model as Kopari does. Indeed, about the only thing uniting most at the Monday demonstration and in the population at large is their rejection of the forced levy on savings accounts. Some would like to see immediate new elections, others want a rejection of capitalism. Mostly, though, they want the bailout conditions to be altered. Immediately.

The diminutive size of the protest might lead one to doubt its effectiveness. After all, it wasn't even big enough to cause traffic interruptions and just a handful of police were on hand -- a far cry from the rioting periodically seen in downtown Athens. The slogans on the signs -- "Fuck Europe," "Hands Off Cyprus," and "Fuck the Bankers" -- were much more aggressive than the mood among those at the gathering. Monday, after all, was a holiday, with many in Nicosia taking the opportunity to take a long-weekend outside the city or to spend the day with family.

Still, the protest -- and the national mood it symbolized -- had its effect. As did growing concerns in Europe and on the financial markets on Monday that a savings account levy could do irreparable damage to trust in Europe's banks. On Monday evening, euro-zone finance ministers granted Cypriot parliament an extra day to determine exactly what accounts might be affected by the levies. In total, Cypriot account holders are expected to come up with €5.8 billion for bailing out the country's ailing banking system. The euro-zone bailout fund European Stability Mechanism is to contribute €10 billion.

But on Monday evening, President Anastasiades informed Merkel and European Monetary Affairs Commissioner Olli Rehn that opposition in the country's parliament was building and that a majority for the bailout deal was in doubt.

That, certainly, would be welcome news to those who spent Monday afternoon in front of the parliament building. more